Never Invest In a Franchise before Asking These 13 Questions
Franchising has become an emerging business opportunity for budding entrepreneurs. A franchise often comes with less risk than starting a business from scratch and offers franchisees an accelerated path to profitability & success. Entering into the franchising world can be a very exciting decision for a new entrepreneur. The rewards of working with a respected franchisor can range from selling a well-known product or service is a proven niche to reaping a respectable return on investment.
However, prospective franchisees tend to overlook the downsides of the brand, fail to do enough research, and discover too late that the move was not for them. Therefore, before venturing into this business opportunity, conduct thorough research and due diligence to find the right franchise brand which matches your personality & goals.
Although franchise brands enclose a lot of things about their business in Franchise Disclosure Document (FDD), one must first read the franchise company's FDD and then ask these questions for interviewing prospective franchisor to evaluate the franchise opportunity.
- How Long has the Business been Franchised
Every year, a lot of businesses venture into the franchise industry for the first time. Not all of them are successful. Of course, as a prospective franchisee, you might be inclined towards associating with a brand with years of franchise experience.
With a new franchise, you might be taking a risk, but it’s relatively easier & less expensive to join a new franchise. And always remember that Mc Donald’s, Dominos etc were once a new and small franchise.
Like any investment, there’s a probability of both failure & success when it comes to investing in a franchise, be it a new franchise or an established brand. Thus, determine how stable the franchise you are considering investing in is and what its future may hold.
- How much do I have to Invest before Opening the Doors to customers
One may find the investment requirement in the company website or franchise brochure, but you might incur various other costs afterwards. Thus, it is advisable to ask about the initial investment in detail apart from the basic franchise fee, such as real estate, equipment, leases etc.
Be sure to discuss these items in-depth with the franchisor so that you have a clear understanding of your investment and what you will need financially to get up and running.
- What is the ROI
Franchisors can’t guarantee individual success, but they should have a good idea about the income potential. As a businessman, it is important to know the return of investment you could expect. If the returns are lesser than the bank’s rate of interest then it doesn’t make much business sense to invest. Normally, in a franchise business, the returns are 20-30% on average. So, if it is anything in that bracket, you can go on investing, but for anything less than that then think twice before investing.
- What are the Operational Costs
Your initial investment is just the amount required to get your business started. You will be required to spend capital for running the business. Thus, never forget to ask your franchisor about the operational expenses, which include staff salaries, rent, electricity & water bills, inventory etc.
- Can I expect help with Financing
Franchises usually hesitate to talk monetary angles. Ask your franchisor about whether they will be providing financial support or assist in getting finances for starting the franchise.
- Are there any Financial Incentives or Deals
Many franchisors offer discounts on franchise fee or waive off the royalty for few months to help the business get off the ground. Ask your franchisor about whether they are offering any financial incentives to get your business started.
- What areas of support will you provide and how much support will be offered?
Support is one of the many benefits of buying into a franchise system. Always ask your franchisor about the areas of support they will be providing. Most franchisors provide training & marketing support. Also, ask your franchisor whether they will be providing any other support beyond the initial training. Will they assist in lease negotiations, site selection etc. What support staff will be accessible to you on a day-to-day basis? Make sure you are content with the kind of support provided.
- How much extra capital will I require to cover my living expenses
This is one of the critical factors many new franchisees fail to consider. After becoming a franchisee, there's a considerable amount of gap in time before your franchise gets off the ground and another gap before it begins making enough profit to sustain your living expenses.
You need to prepare a budget and strictly adhere to it by asking about every necessary investment you will be required to make and the amount to cover your expenses and then add a significant reserve on top of this amount.
- What’s a typical day like
You should definitely ask your franchisor to give an insight about day-to-day operations. It will give you a clear picture of your daily work-life, challenges you might face, hard-work, time & energy you will require to spend on the business.
- How do you handle Disputes and Disagreements
While no one wants to experience a conflict of interest with their franchisor, but, when two live in the same house, disagreements are bound to happen. Thus, disputes between you and your franchisor could potentially occur. So, you’ll need to understand the best method for resolving it. Ask about how they will handle any future disagreements and who will have an upper hand in that.
Furthermore, it’s important to find out if the franchisor has had a history of disagreements, or pending lawsuits, with other franchisees in the past.
- How many franchise owners have failed and why
Not every business is successful. Even if you considering established players, they are surely gonna have few failed franchisees. For instance, McDonald’s is among the top 10 franchises in the world, but they too had many failed franchisees in Delhi and had to shut them.
So, always ask your franchisor for honest feedback about their failed franchises and what the reasons behind that were. This will help you to evaluate the success of your franchise & also learn from the mistakes of others.
You should also talk check about the customer reviews online if there are low customer satisfaction feedbacks; you should consider another franchise brand.
- Can I Speak with Current Franchisees
Most franchisees fail to consider this part, but this is a critical part of the due diligence investigation. Franchisors are required to disclose the contact information for both current and past franchisees.
You can get an honest perspective about the pros and cons of the business, review of the franchisor, how to run the business and much more. If your franchisor tries to discourage you from speaking to other franchisees, consider it as a red flag.
- Is there an Exit Strategy?
It is natural to not think about an exit strategy as when you venture into a business, you are highly motivated and want the business to be successful. However, you need to be prepared for the worst and should have an exit plan prepared if things don’t work out well. You should clearly ask your franchisor about the exit strategy like can they pass on the franchise to a relative or children or sell it to another franchisee? Or will the franchisor buy it back? Will they provide any help in selling the business at any?